February 10, 2009

Construction in Ramallah (AP)

"If the key issues that affect peoples’ daily lives are not tackled, in tandem with the economic issues, then all of the economic initiatives are at risk of being undermined, and the various stakeholders' credibilities would be at stake."

Can you tell us about the Palestinian economy and the differences and similarities between the West Bank and Gaza?

I’m not going to bore you with statistics and numbers and details, but in general, let’s look at the macro economy. The West Bank macro economy has done relatively well. There have been success stories. There’s been progress. Companies have demonstrated growth and have realized solid earnings both in 2007 and 2008. Some of the leading companies that are listed on the Palestine Stock Exchange have performed well, and actually, the Palestine Stock Exchange itself, reflects good performance, especially compared to neighboring countries in the region. It also largely avoided the tsunami that resulted from the fallout of the subprime and then, the global financial crisis. We largely avoided that whole crisis for a couple of reasons. Number one is we’re not a major exporter, which means we are not affected by a decrease in demand for our products. Number two, the financial sector, the Palestinian banking sector, is probably the most liquid and most solid banking sector in the region, in terms of liquidity possibly even on a world-wide level.

You know, the total asset base of the banking system is about seven billion dollars as of the end of 2008, while the total loan exposure, credit exposure of the banking system is only around 1.7 billion. So it’s a highly liquid banking sector, not overleveraged, not leveraged at all, actually. And the Palestine Monetary Authority 1 is a traditional regulatory authority. It doesn’t allow the banks to invest in risky instruments or go into complicated transactions. It really monitors the banks in terms of how they lend. So that really saved us. If anything, the regulator and the banks have demonstrated growth and stability, and therefore, confidence, and there’s been a cultural shift among the public in the West Bank and Gaza.

People are more likely now to deposit cash at banks and deal with banks. Culturally, the old fashioned way was to keep money under the floor board and under the mattress, and trust your money with a money changer on the high street because that’s what people traditionally did before banks began to spread and flourish across the West Bank and Gaza. So you know, more people are depositing cash at banks, more people are trusting banks, and gradually banks are offering more products and services. Slowly the banks are increasing their loan to deposit ratios. Loan to deposit ratios have increased from 25 percent to 35 percent and the Palestine Monetary Authority is trying to stimulate banks to lend more. And that’s where initiatives like the loan guarantee programs that have been headed by MEII, OPIC and USAID and all of these programs do help because they encourage banks to lend more through risk sharing, through guarantees, and through technical assistance to install good risk management practices within the banks.

For example, microfinance. We’re now installing a microfinance division within the bank, and this will benefit thousands of small businesses, and farmers. We’re looking to expand our branch network—the Bank of Palestine has 34 branches right now and we’re looking to add another 20 branches over the next couple of years, mainly in the West Bank and mainly in rural areas. The nature of the ground in the West Bank is that because of the checkpoints, the wall and freedom of access and movement restrictions, people spend the best part of a full day to get to the nearest bank from their village or their town—be it waiting at checkpoints, be it trying to pass the wall. You have to do a huge detour to get from A to B because of a wall. So the aim is to open branches within villages and small towns so that we provide people with banking services, financial services and not just collect deposits, but give credit and lend to the small business community in those areas, including agriculture.

A big percentage of the Palestinian economy is linked to agriculture and would greatly benefit from small loans, but microfinance lending hasn’t really been institutionalized and approached seriously on a long-term, sustainable basis through a wide network of banks. The banks haven’t adopted this in the past. I feel this is a great opportunity, now, for all of the banks to do that.

And the security—I’m going to get into some politics. The security situation in the West Bank is much better than it used to be thanks to the good work that was done together with aid from the United States on enhancing our security forces on the ground in the West Bank—General Dayton’s work and General Jones’. Everything in the end is about security. Security makes a big difference to the people. People feel safer about expanding their businesses, taking more risks because the overall environment is less risky. And at the end of the day, banks then accept applications to lend to these people to expand their businesses. So it’s sort of a domino effect and we’re really pleased that now the situation in the West Bank has improved and allows us to expand and it’s a whole cycle. But at the end of the day, the settlements have expanded, the checkpoints have increased, the wall continues and there are still a lot of restrictions.

As I said, the ironic thing is that on the one hand, the overall macro economy is improving. Unemployment in the West Bank is stable, maybe decreasing a little bit. The problem is that unemployment in Gaza has rocketed to over 50 percent, but in the West Bank, it’s more like 20 percent. And jobs are being created in the West Bank. There are housing construction programs that will build about 30,000 housing units in some key development projects. Not only will these projects provide a supply of new affordable housing that is desperately needed but also create thousands of jobs. The housing program is part of an initiative that also includes the creation of the first mortgage facility. So for the first time now, the banks will be able to offer fixed, long-term mortgages of 20 to 25 years. You know, this product never existed. These affordable homes and mortgages will allow more people to own property rather than resorting to either living with family or building on top of their parent’s house or renting. So it will create wealth by building up equity in property ownership.

The irony is that the financial system is solid and sound, but we have some fundamental issues with the banking system. One is that we have our own liquidity crisis; but it’s not because the banks are in trouble because of subprime or the global financial crisis, but rather because we can’t physically get access to or move cash. The cash supply in the West Bank and Gaza is still controlled by Israel. We are largely a shekel-based economy and the currency on the streets is the shekel. That is part of the restrictions that we suffer from—movement of goods, people and trade, and all of that, the list goes on and on. One of the main things is cash. We can’t move cash from where the branches have a cash surplus to where they have a deficit. For over a year, the banks in Gaza have been suffering from a crippling cash deficit. You have hundreds of thousands of customers, bank depositors, people like me and you who have savings and salaries in banks, and they cannot withdraw their money. The humanitarian aid money that is going to the thousands of hardship cases can’t be distributed. The NGOs and relief agencies, such as UNRWA, that need to do work on the ground can’t pay for contractors or pay for foodstuffs or medical equipment, and the list goes on.

Cash, at the end of the day, is as basic as electricity or water or food or medicine. It’s a basic commodity for trading goods. And this is causing a potential collapse of the banking system. The official regulated banking system in Gaza is on the verge of collapse. Also obviously, the siege on Gaza and the closure of the crossings has killed the economy. You have 50 percent unemployment; you have 35,000 businesses, including factories, that are working at five or ten percent capacity. You have layoffs. On top of that there is the devastation resulting from the war; a lot of businesses have been burned and factories destroyed. From a banking point of view, if I look at statistics, in the year 2000, Gaza represented a total of 40 to 45 percent of total lending in the banking system, and today it’s about less than 10 percent. So it’s a huge drop in credit facilities in the banking system in Gaza.

The problem is that with the closure policy, with all these restrictions, the institutions, the banks, the private sector have almost been destroyed, and it is critical to get the crossings open, to get the money supply back. This is the official regulated financial sector. We’ve seen the results of a major crisis in the banking system in the U.S and the kind of ripple effect it has on the economy, on Main Street and on people.

So how do you respond to concerns that letting the money into Gaza is helpful to Hamas?

Letting money into Gaza, like letting in food and medical supplies, is helpful to the people of Gaza. The banking system is regulated by the Palestine Monitoring Authority, part of the Palestinian Authority. Hamas, at the end of the day, although it is the authority in Gaza, doesn’t have oversight or direct dealings with the banks in Gaza. They have their own means and their own ways of managing their finances, so at the end of the day the closure on Gaza has, if anything, just affected the people. You mustn’t forget that there are about 70,000 civil servants in Gaza that remain on the pay roll of the Palestinian Authority under Dr. Salem Fayyad, the prime minister. About 40 percent of the employment in Gaza is by the PA. Despite the salaries being transferred electronically, the physical cash isn’t there. So there are 70,000 families and the average family size is about 7, so that’s approximately 500,000 people that can’t get their money every month. This money plays a vital role in keeping the economy alive in Gaza. The United Nations not only relies on cash to give to the hardship cases, but is also a major employer in Gaza. They have almost 10,000 employees, directly or indirectly, and they can’t get access to their cash and the same applies to the numerous NGOs and aid agencies that operate in Gaza.

From what I understand, most of the economy is becoming a black market economy that is based on the tunnels?

The hundreds of tunnels that have been dug are a direct result of the siege on Gaza and crossing closures with Israel. This has created a flourishing black market economy that has almost killed the business of the registered companies and well-established traders. Even after the war the majority of the tunnels continue to operate business as usual.

The siege and cash restrictions to the banks in Gaza has also created some illegal financial investment entities that are associated with tunnel operations and offer depositors or investors attractive returns of more than 40 percent per month. People are afraid that if they deposit their money in the bank today, that tomorrow they might not be able to access it. So they would rather invest it in such schemes or entrust it with unregulated street money changers or keep it at home. When you don’t have a regulated environment, these things grow and flourish.

What do think can be done to improve both the banking situation and the overall economy for Gaza and the West Bank?

We need desperately a normalization of the relationships between the Israeli banks and the Palestinian banks. There’s 20 billion shekels of trade between Israel and Palestine per year. There are thousands and thousands of Israeli companies and Palestinian companies trading with each other using Israeli and Palestinian banks. We are neighbors.

The deteriorating situation in Gaza and deterioration in Israeli-Palestinian relations has caused a lot of concern to the private commercial banks in Israel, which has had a detrimental effect on relations between Israeli and Palestinian banks. Unfortunately, the Israeli commercial banks are no longer willing to take the risk of dealing with the banks in Palestine and providing the necessary corresponding banking services.

How does a commercial Israeli bank deal with a Palestinian bank that also has branches in Gaza? How are they supposed to transact with the banks in Palestine when the government of Israel announces that Gaza is an enemy entity? As such they are exposed to liability cases..

If the goal is a two-state solution living side by side in peace, we need a financial system solution that can also work in partnership, in peace. Palestine, however, does not yet have a central bank, doesn’t have its own currency, does not control its own borders, cannot move money between and around its territory, it remains completely dependent on the Israeli financial system, on the shekel and the Bank of Israel to provide us with notes and the Israeli corresponding banks to transact and support the trade flows. If the Palestinian banking system can’t operate due to the Israeli restrictions, then it cannot transact to support a Palestinian economy and trade, then international aid programs become useless. If you speak to a Palestinian telecoms company, a beverage company or a pharmaceutical company, they’ll give you a whole host of restrictions imposed that make operating the business less efficient and more costly. These restrictions are related to Israeli security concerns—importing certain equipment for factories, importing certain chemicals, certain raw materials. Things can get held up for years at Israeli customs before they are examined and released and go through all the red tape and bureaucracy of trying to get those goods to the West Bank. I’m not even talking about Gaza, as nothing has been allowed in for years. I’m talking about West Bank-based companies that are operating under crippling restrictions. This costs Palestinian companies millions of dollars, directly or indirectly.

I estimate that Palestinian companies lose hundreds of millions of dollars, either indirectly or directly because of subtle technical and sophisticated restrictions like the ones that prohibit banks from moving cash from the West Bank to corresponding banks in Tel Aviv. I’m not talking about the settlements or checkpoints or the wall or military incursions, these are economic restrictions that we suffer from.

As a CEO of a bank I try to visit my 25 branches in the West Bank, from Jenin in the north to Hebron in the south. The West Bank is a small piece of land, and if you are free to move around you’d cover all the cities in less that one business day, but it takes me at least a full day to go from Ramallah to Nablus and back. I spend unnecessary hours at checkpoints and clocking additional miles to detour the separation wall that weaves through the West Bank. Hours spent at checkpoints and detouring the wall has become the daily life of millions of people in the West Bank, and it’s a daily humiliation. There is a very famous formula; time equals money, so imagine the billions of dollars in additional cost people incur just trying to go to work each day or visiting families.

The Agreement on Movement and Access signed in November 2005 between the Government of Israel and the Palestinian Authority must be respected and implemented as soon as possible to improve the lives of millions of people so that they can travel freely within the Palestinian territories efficiently and in dignity.

It sounds like you are talking about the connection between the political, the economic and security, and the need for all of them to move forward together.

Absolutely, it would be a naive approach to focus on aid money and economic initiatives alone. If the key issues that affect peoples’ daily lives are not tackled, in tandem with the economic issues, then all of the economic initiatives are at risk of being undermined, and the various stakeholders’ credibilities would be at stake. Much time, effort and money could be wasted on the part of the Palestinian private sector as well as our international partners and donors that have come to help stimulate the economy and create jobs.

We talked about the security in the West Bank, and the PA’s great results there, but that’s all undermined when you have Israeli raids and incursions almost on a daily basis. That takes away the credibility of all the good work that’s been done. So, absolutely, you have to have all tracks working in sync. You cannot have just a focus on the economy and think that things will fix themselves. No, you have to work on all tracks. You have to work on fixing the settlements, you have to work on reducing the checkpoints and stimulating the economy as well, and that will bring tangible results to the people.

How does your bank implement UN Security Council financial sanctions?

Bank of Palestine and all banks in Palestine are regulated by the Palestine Monetary Authority (PMA) that applies and enforces laws and best practices. Furthermore the Bank of Palestine has had corresponding banking relationships with Israeli banks, Citigroup, JP Morgan, HSBC, Deutsche Bank, Commerz Bank, with all of these global banks and financial institutions and we’ve had relations with them since the seventies and eighties. And by default, again, for us to even operate and transact with these banks we have to abide by those same regulations. Transactions, wire transfers, incoming/outgoing transactions, trade finance transactions, are all screened and checked and there’s no room for a mistake. One of our major shareholders is the IFC which is a member of the World Bank—it’s a AAA rated organization. In order for them to acquire a stake in the bank, we went through about six months of due diligence, and auditing. The quality of our shareholder base also reflects a clear stamp of confidence and assurance. For the past two years, the PMA has been engaged in a Strategic Transformation Plan—a major restructuring process designed to transform the PMA into an independent, transparent, modern, efficient and well-governed central bank. The PMA has come a long way in implementing this plan and according to two recent IMF reports on the performance of the PMA, the transformation has been a great success.

Today, the PMA is one of the few regulators in the region that can claim the highest level of transparency and good governance through four independent offices that report directly to the board of directors: one, the ombudsperson’s office, which acts as a facilitator and mediator for the resolution of complaints concerning supervisory actions; two, the ethics office, which is responsible for establishing and maintaining ethical standards; three, the internal audit and risk management office, which uses modern international audit standards and procedures and ensures compliance with relevant laws and procedures; and four, the legal office which ensures independent legal advice. Another important milestone achieved in the strategic transformation plan is the implementation of a new Anti-Money Laundering Law (AML) in 2007 to ensure international confidence in the Palestinian banking system. These governance features have contributed to increasing the confidence of the public, the banking sector, international banks and organizations such as the IMF, and the World Bank in the PMA and the Palestinian banking sector.

From your perspective, if you could have a conversation with George Mitchell, what would be your advice to him, or what would you ask him for as he starts?

I would simply ask him to refer back to recommendations that were made in the first assessment he did in the 2001 Mitchell Report. If he can achieve those things that he clearly laid out in his report as critical key items then the finish line will be within easy reach. The situation is a lot worse now with what’s happened in Gaza and with the expansion of the settlements. It will certainly be a greater challenge for him, but he managed to do a great job in Northern Ireland—which also seemed an impossible mission at the time. Everyone is waiting to see how quickly and fairly he will tackle the issues of both parties and bring them to a final and just agreement. The expectations are very high of President Obama and his new administration. In Palestine, there is an air of hope and excitement as people wait to see what “change” Obama will bring.

If I could recommend to Senator Mitchell one thing it is that time is critical now for some “quick wins.” When I say some quick wins, I mean immediate actions that will touch the people directly. Four quick wins could make a big impact on the ground. One, humanitarian aid to Gaza. Aid must be delivered swiftly to help ease the immediate suffering and rebuild people’s homes, businesses and infrastructure. Two, movement of goods and people. An independent task force should be set up to monitor and seek ways to improve access and movement between Gaza and West Bank, within the West Bank, Israel, and third countries for Palestinians, Arabs of Palestinian origin, non-Palestinian businesspeople and tourists. Three, appoint an economic coordinator under the direction of Senator Mitchell to investigate and seek to alleviate the political challenges or obstacles specific to businesses in different industries. And finally, alleviate restrictions on movement of cash. Currently, banks in Gaza are suffering from a shortage of cash that has severely impeded operations. In the West Bank, banks are unable to move their cash out and, therefore, face significant security risks as well as opportunity costs from an inability to invest the cash. We believe such restrictions have no positive impact on Israeli security and therefore should be eliminated.

1 The Palestine Monetary Authority (PMA) is the emerging Central Bank of Palestine. Its purpose is to maintain the stability and effectiveness of the Palestinian financial system, Promote sustained economic and financial growth of the Palestinian economy through effective and transparent regulation and supervision of banks operating in Palestinian territory. The PMA was established in 1995 by presidential decree as an independent institution and later by an act of the Palestine Legislative Council, PMA Law Number (2) of 1997, which outlined the full authority and autonomy of the PMA.

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